Trade war already threatens to ruin Christmas for retailers

By Matt Townsend and Hema Parmar

|Bloomberg|

Jul 06, 2018 | 7:40 AM

“The toy business is dependent on the Chinese, and I don’t see that changing," said Isaac Larian, CEO of MGA Entertainment. Above, Larian in 2010 with a line of Bratz dolls. (Christina House / Los Angeles Times)

It’s only July, but Christmas is fast approaching for U.S. retailers — and the threat of an escalating trade war with China has industries that have so far been spared increasingly worried their goods will be next on the naughty list.

President Trump’s threat to slap tariffs on at least an additional $200 billion in goods from China — on top of the $34 billion that went into effect Friday — is ramping up fears that the crucial holiday shopping season will be a casualty in the battle with America’s largest trading partner.

“Retailers have already made the buying decisions for what will be on the store shelves in the fall for Christmas holidays,” said David French, senior vice president of government relations at the National Retail Federation. If items aren’t imported before any possible tariffs go into effect, it will lead to “higher prices, a cut into consumer spending and a cut into consumer confidence — and we are very concerned about it.”

The Trump administration has so far made good on its promise to keep consumer goods off the initial round of tariffs, with the 25% levy on $34 billion of imports that came into effect Friday focused on machinery. But if a new trade agreement isn’t reached, Trump has threatened to add a 10% tariff on an additional $200 billion of Chinese-made goods, potentially doubling that to as much as $400 billion in the event of Chinese retaliation. That would capture about 80% of all Chinese imports and ensure some sneakers, clothing, smartphones and toys would be targeted.

Karaoke machines

“It creates a lot of uncertainty for everybody,” said Gary Atkinson, chief executive of Fort Lauderdale, Fla.-based Singing Machine Co., which sources 100% of its karaoke machines and other gear from China. “Hopefully, our product line never shows up on one of those list of tariffs.”

But if it does, the small publicly traded company would go down the same path that thousands of others have since Trump began enacting tariffs on other countries such as Mexico and Canada in a push to reduce America’s trade deficit. Atkinson says he’d probably have to raise prices, which would decrease demand — a big risk during the holiday shopping season. That would cause his company to place fewer orders from its Chinese suppliers, which would hurt those suppliers too.

“It would have a trickling effect all the way down,” Atkinson said.

One major issue is that supply chains can’t be moved overnight, especially for a retail sector that tends to place orders months before items arrive in stores. U.S. companies have spent years forging business relationships overseas and have come to rely on the expertise and reliability of Chinese factories. In the toy industry there are few options outside China, especially with more complicated items.

“We tried Vietnam and Indonesia, and they don’t have the infrastructure the Chinese do,” said Isaac Larian, CEO of Los Angeles toymaker MGA Entertainment Inc. “The toy business is dependent on the Chinese, and I don’t see that changing.”

Next round

In addition to the tariffs on $34 billion worth of Chinese goods that began at 12:01 a.m. Eastern Time on Friday, an additional set of duties on $16-billion worth of goods against the nation is still pending. China has said it will hit back, matching each of those amounts in tit-for-tat tariffs against the United States, thus making official a trade war that has brewing since Trump called for extra duties in March.

“Everybody’s anxious about the administration’s actions here boomeranging and hurting American consumers as they go shopping for the holiday season,” the National Retail Federation’s French said.

Hun Quach, vice president of international trade for the Retail Industry Leaders Assn., said the “barrage of tariffs coming from all directions” between the U.S. and China, the European Union and NAFTA partners are a threat to U.S. prosperity and “will imperil millions of jobs if allowed to persist.”

“Americans are caught in the crosshairs of the [Trump] administration’s three-front trade war, and they will be the ones paying the price,” Quach said in an emailed statement Friday. “The recent onslaught of tariffs will jeopardize manufacturing and agriculture jobs in the U.S., while driving up prices on household items.”

There are still a few things that need to happen for the trade war with China to escalate to the point of hitting retailers and consumer goods. For instance, Trump’s administration needs to officially announce the $200-billion round of tariffs; so far, Trump has only threatened it.

Negotiating tactic

UBS Securities economist Robert Martin said he sees the threat of as much as $400 billion in new levies as just a negotiating tactic. China and the U.S. probably will reach some kind of resolution in order to avoid the mutual economic harm of a rapidly escalating trade war, said Martin, who served on President George W. Bush’s Council of Economic Advisers.

“We believe the tariffs stop at $50 billion from the U.S., and that you don’t see the extra $400 billion,” Martin said.

Advertisement

But if he’s wrong, what lies ahead is “uncharted territory,” with the potential for severe economic effects. And that could be blow for a retail sector that’s still struggling with broader industry shifts and falling foot traffic.

“Businesses can adjust to almost anything, except uncertainty,” said Hannah Kain, CEO of Alom Technologies Corp., a supply-chain management company. “There is so much uncertainty out there that everyone is sitting back and waiting to see what happens.”